Health Insurance (prudential standard) determination No.1 of 2018

EXPLANATORY STATEMENT

Prepared by the Australian Prudential Regulation Authority (APRA)

Private Health Insurance (Prudential Supervision) Act 2015, section 92

APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by all registered private health insurers under subsection 92(1) of the Private Health Insurance (Prudential Supervision) Act 2015 (the PHIPS Act).

On 14 September 2018, APRA made the Health Insurance (prudential standard) determination No. 1 of 2018 under subsection 92(1) of the PHIPS Act, (the instrument), which determines the new Prudential Standard HPS 310 Audit and Related Matters (HPS 310).

The instrument commences on 1 July 2019.

1. Background

APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system. APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions.

APRA has undertaken a review of the prudential framework for private health insurers to ensure it is fit for purpose and aligns with APRA’s mandate as outlined in the August 2016 letter to industry: Private health insurance: prudential policy outlook. APRA formed the view that the role of external auditors in identifying and building insurer resilience to emerging risks was underutilised. A prudential standard expanding the role of the auditor would improve audit outcomes and support the effectiveness of APRA’s supervision. 

Prudential Standard HPS 310 Audit and Related Matters (HPS 310) is a new prudential standard for private health insurers. The obligations imposed on private health insurers align with the audit prudential standards applying to other
APRA-regulated institutions.

2.             Purpose of the instrument

The purpose of the instrument is to determine HPS 310, which sets out prudential requirements for private health insurers to obtain independent advice in relation to the operations, financial position and risk controls of the business operations of the private health insurer. This advice is designed to assist the Board and senior management in carrying out their responsibilities for the sound and prudent management of the business operations of the private health insurer.

3.             Operation of the instrument

The key requirements of HPS 310 are that a private health insurer must:

• appoint an auditor (Appointed Auditor);
• make arrangements to enable its Appointed Auditor to undertake his or her role and responsibilities to audit the financial statements and annual information required by APRA in relation to a private health insurer (including special purpose engagements), and provide a report to the private health insurer regarding such reviews;
• submit to APRA all reports required to be prepared by its Appointed Auditor including the Appointed Auditor’s report or a special purpose report by an agreed auditor engaged to prepare such a report, as required under HPS 310; and
• facilitate APRA liaison with an Appointed Auditor and the special purpose engagement auditor, if required.

4.             Consultation

In August 2016, APRA released a three year Prudential Policy Outlook for the private health insurance industry. A proposal for the establishment of a separate audit prudential standard has been discussed at industry forums since mid-2017.

In February 2018, APRA released for public consultation a discussion paper, Governance, fit and proper and audit requirements for private health insurers, which included two new prudential standards covering fit and proper and audit requirements and a refreshed governance standard.

APRA presented the reforms via a wide range of industry forums and held round table discussions with the relevant external actuarial and auditing firms on the proposed requirements.

APRA received nine written submissions in response to the discussion paper, which were all supportive in principle of the measures designed to strengthen insurer resilience to emerging risks. 

All submissions supported the introduction of a prudential standard covering audit and related matters for the industry. There was general agreement that auditors can be of greater assistance to insurers in managing the insurer’s operational risk by providing an impartial review of internal systems, processes and controls.

The Office of Best Practice Regulation advised that a Regulation Impact Statement was not required for this determination.

6.             Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.

ATTACHMENT A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Health Insurance (prudential standard) determination No.1 of 2018

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).

Overview of the Legislative Instrument

The purpose of this Legislative Instrument is to determine Prudential Standard HPS 310 Audit and Related Matters, which sets out prudential requirements for a private health insurer to maintain independent advice in relation to the operations, financial position and risk controls of the business operations of the private health insurer. This advice is designed to assist the Board and senior management in carrying out their responsibilities for the sound and prudent management of the business operations of the private health insurer.

This is a new prudential standard which is designed to ensure that the prudential framework for private health insurers remains fit for purpose; in particular, to protect policyholder interests and ensure robust prudential outcomes by setting robust audit requirements that apply consistently across all private health insurers and other APRA-regulated institutions where appropriate.

Human rights implications

APRA has assessed the instrument against the international instruments listed in section 3 of the HRPS Act and determined that it does not engage any of the applicable rights or freedoms.

Conclusion

This Legislative Instrument is compatible with human rights as it does not raise any human rights issues.